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The currency exchange rate between two currencies,

 both of which are not the official currencies of the

country in which the exchange rate quote is given

in.

This phrase is also sometimes used to refer to

currency quotes which do not involve the U.S.dollar, regardless of which country the quote is

 provided in.

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Assume that the following major exchange rates areknown:EUR/USD = 1.0060/65GBP/USD = 1.5847/52USD/JPY = 120.25/30USD/CHF = 1.4554/59

To calculate GPB/CHFGBP/USD: Bid: 1.5847 Offer: 1.5852

USD/CHF: 1.4554 1.4559

GBP/USD X USD/CHF = 1.5847 X1.4554 /1.5852 X1.4559

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Cross rates are the exchange rates of 1 currency

with other currencies, and those currencies with

each other.

Cross rates are equalized among all currencies

through a process called triangular arbitrage.

Below is a table of key cross rates of some major 

currencies.

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Cross rates are the exchange rates of 1 currency with othercurrencies, and those currencies with each other. Cross rates areequalized among all currencies through a process called triangulararbitrage. Below is a table of key cross rates of some major

currencies.

K ey Cross Rates for 5/14/2007. (Source: MarketWatch.com)

Currency USD GBP EUR JPY

USD 0. 0443 0. 3951 120.10500

GBP 1.98244 1.46603 238.10043

EUR  1.35225 0.68211 162.41160

JPY 0.83260 0.41999 0.61572

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All currency quotes are given in pairs, and each pair can be expressed asa fraction. To illustrate, if a Great Britain pound (GBP) is worth

1.98244 USD, then this can be expressed as the fraction 1.98244 USD/1

GBP. We also see from the above table that a Euro is worth 0.68211

GBP, which can be expressed as 0.68211 GBP/1 EUR .

From these 2 fractions, we can calculate what the USD is worth in EUR.

GBP cancels out, resulting in a quote for dollars per Euro. As you can

see, this is very close to the actual quote, 1.35225, from the table above.Because we are ignoring the bid/ask spread and transaction costs to

simplify the math in this example, there is no reason to believe that it

would be exact. It is also true that arbitrage is not a perfect equalizer 

 because the market is not perfectly efficient.

EUR/USD =

1.98244 USD

X

.68211 GBP

= 1.3522421

1 GBP 1 EUR  

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